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July 3, 2009

Economist's View - 7 new articles

Malthus "Would have been Very Much at Home in the Blogosphere"

In Thomas Malthus' time, there was a dispute over the corn laws (which were tariffs on imported grains imposed in the early 1800s). Landlords favored the corn laws, and though the landlords were the most powerful class at that time, they were coming under increasing attack from the rising merchant and industrial capital classes. Why the conflict?

The tariffs raised the price of corn, something the landlords favored, but since corn was a key component of the subsistence workers relied upon to survive, the price of labor - the wage rate - would reflect the price of corn. If the price of corn was high, wages would be high, and when the price of labor rises merchants and capitalists would have a more difficult time selling their goods profitably. The fear was compounded by the end of the Napoleonic wars and the threat of large imports of cheap grain from France.

So what was the effect of the corn laws on the price of corn, on wages, on the welfare of the poor, and so on? Finding an answer to this question, as well as the answer to what impact poor laws have, and what causes gluts (recessions) drove both Malthus and Ricardo to develop theoretical models that could guide them to the answer and hence to the correct policy prescription. Thus, their analytical contributions to economics were driven primarily by the important social questions of the time.

Here's more on Malthus:

Malthus blogging on the Corn Laws, by Daniel Little: I think that Thomas Malthus would have been very much at home in the blogosphere. He weighed in on the issues of the day, bringing careful logical analysis of economic theory to bear on the policy issues that were up for debate. And he was very interested in making the connection between economic principles and real empirical evidence. This is particularly true in his contributions to the debate on the Corn Laws in 1814 and 1815. Malthus authored pamphlets on these issues in 1814 ("Observations on the effects of the corn laws"; link) and 1815 ("Grounds of an opinion on the policy of restricting the importation of foreign corn"; link), and they repay scrutiny today; they are powerful instances of a very smart economist probing the theory and the facts surrounding a complex policy issue. (Here is a nice survey of Malthus's theories; link.)

The Corn Laws might be thought of as a form of "stimulus package" for the British economy in the early nineteenth century. By setting a high tariff on the import of wheat and other grains, Parliament aimed to protect the agricultural sector and to encourage the expansion of grain production to make Britain more independent from external grain providers. One might also compare the debate to the NAFTA debate or to policy deliberations in the 1960s concerning "import substitution" strategies. Opponents argued that removal of the tariffs would bring down the price of grain, a central component of the wage basket; this would help the poor and would also permit a significant reduction of the wage as well. So the issue divides the interests of land owners, industrialists, and the poor.

Malthus's position in the two essays is somewhat different. In the first article he promises to lay out the issue dispassionately, dispelling false opinions about what the effects of the proposed policy might be and diving into the advantages and disadvantages of the policy. He writes that "some important considerations have been neglected on both sides of the question, and the effects of the corn laws, and of a rise or fall in the price of corn, on the agriculture and general wealth of the state, have not yet been fully laid before the public." A bit further on, he writes:

My main object is to assist in affording the materials for a just and enlightened decision; and whatever that decision may be, to prevent disappointment, in the event of the effects of the measure not being such as were previously contemplated. Nothing would tend so powerfully to bring the general principles of political economy into disrepute, and to prevent their spreading, as their being supported upon any occasion by reasoning, which constant and unequivocal experience should afterwards prove to be fallacious.

So--"let's do rigorous and systematic analysis based on the principles of political economy and our best understanding of the facts." Good advice for a policy debate.

Quite a bit of the analysis is devoted to refuting an idea that Malthus attributes to Adam Smith ... [...continue reading...]

Does Lack of Insurance Distort the Market for Romance?

[Suggested by email]

Obama Economic Forecast

Spencer at Angry Bear:

The right is having a lot of fun commenting about the economic forecast by the Obama team being too optimistic. ... I guess they are right, Obama along with everyone else has massively underestimated the damage Team Bush did to our economy.

Rationing Health Care

Uwe Reinhardt:

'Rationing' Health Care: What Does It Mean?, by Uwe E. Reinhardt, Economix: As the dreaded R-word — rationing — once again worms its way into our debate on health care reform, it may be helpful to relearn what is taught about rationing in freshman economics.

In their well-known textbook Microeconomics, the Harvard professor Michael L. Katz and the Princeton professor Harvey S. Rosen, for example, put it thusly:

Prices ration scarce resources. If bread were free, a huge quantity of it would be demanded. Because the resources used to produce bread are scarce, the actual amount of bread has to be rationed among its potential users. Not everyone can have all the bread that they could possibly want. The bread must be rationed somehow; the price system accomplishes this in the following way: Everyone who is willing to pay the equilibrium price gets the good, and everyone who does not, does not. [Italics added.]

In short, free markets are not an alternative to rationing. They are just one particular form of rationing. ...

Many critics of the current health reform efforts would have us believe that only governments ration things.

When a government insurance program refuses to pay for procedures that the managers of those insurance pools do not consider worth the taxpayer's money, these critics immediately trot out the R-word. It is the core of their argument against cost-effectiveness analysis and a public health plan for the non-elderly.

On the other hand, these same people believe that when, for similar reasons, a private health insurer refuses to pay for a particular procedure or has a price-tiered formulary for drugs – e.g., asking the insured to pay a 35 percent coinsurance rate on highly expensive biologic specialty drugs that effectively put that drug out of the patient's reach — the insurer is not rationing health care. Instead, the insurer is merely allowing "consumers" (formerly "patients") to use their discretion on how to use their own money. The insurers are said to be managing prudently and efficiently, forcing patients to trade off the benefits of health care against their other budget priorities. ...

One must wonder where people worried about "rationing" health care have been in the last 20 years. Could they possibly be unaware that the United States health system has rationed health care in spades for many years, on the economist's definition of rationing, and that President Obama and Congress are now desperately seeking to reduce or eliminate that form of rationing?

Let me remind rationing-phobes what they would find in the huge body of research literature and media reports on our health system, should they ever trouble themselves to read it ...[list here]...

As I read it, the main thrust of the health care reforms espoused by President Obama and his allies in Congress is first of all to reduce rationing on the basis of price and ability to pay in our health system.

An important allied goal is to seek greater value for the dollar in health care, through comparative effectiveness analysis and payment reform. ...

To suggest that the main goal of the health-reform efforts is to cram rationing down the throat of hapless, non-elite Americans reflects either woeful ignorance or of utter cynicism. Take your pick.

I tired to make the same basic argument here: "Health Care Rationing Rhetoric".

Bruce Bartlett:

Health Care: Costs And Reform, by Bruce Bartlett, Commentary, Forbes: When asked about the federal government's long-term budget problem, Barack Obama always responds that it is essentially a health issue. Unless we fix the health care system, he says, we cannot get control of the budget. This is the key reason why Obama has stressed the need for health reform this year.

There is certainly truth in this proposition. ... According to CBO, spending for Medicare has risen 2.3% per year faster per beneficiary than growth of nominal GDP per capita since 1975. Obviously, this is a trend that cannot be allowed to continue or Medicare will eventually eat up 100% of currently projected tax receipts.

The problem of health care spending growing faster than incomes is also a problem that plagues the private sector, which explains why total spending on health care in the economy has doubled over the last 30 years to a current level of about 16% of GDP. CBO estimates that this percentage will double again over the next 25 years to 31% of GDP.

Americans widely believe that while the our health system is expensive it is nevertheless the best in the world. However, a new report from the Organization for Economic Cooperation and Development suggests otherwise. ...

We spend $7,290 per person on average versus $2,964 among all OECD countries. Norway, the nation with the second most expensive health system on a per capita basis, spends $4,763. ...

Of course, Americans know that they pay a lot for health... But they also fear that any further expansion of government involvement in the health care system will only make it more expensive. ...

The international data, however, show no evidence that increasing government's share of health care expenditures raises health spending as a share of GDP. The top five countries with the highest government share of total health outlays spend almost exactly the same percentage of GDP on health as the lowest five countries excluding the U.S.: 8.2% of GDP on average for the former versus 8.3% of GDP for the latter. (I left out the U.S. because it skews the data; the bottom five countries including the U.S. spend 9.7% of GDP on health on average.)

Even more significant is the fact that despite spending vastly more on health than any other country, the U.S. has little to show for it in terms of key measures of health resources. For example, we have fewer physicians per capita than most other OECD countries... Only four OECD countries have fewer acute care hospital beds per capita than the U.S. ...

Nor has the U.S. bought significantly better health with its vastly higher health spending. ...

The U.S. does excel at one thing: the amount of highly expensive medical equipment per capita. ... But our lead in high-tech equipment is shrinking. A few years ago we had far more CT scanners per capita than any other country; now our lead is much less and several countries have more scanners per capita.

I don't think any health expert doubts that it is possible for the U.S. to spend far less on health than it does today while improving the general quality of health. Obviously this is the case because other countries do it.

Health care reform would be relatively easy if we were starting from scratch. But we aren't. We not only have to design a new system if we hope to lower costs without impairing health care quality, but we also have to figure out how to get from here to there given that we have an enormously complicated health system involving massive government programs along with huge health insurance companies, increasing numbers of businesses dropping or reducing their health care benefits to workers, and a large and growing population of people with no health insurance at all.

It's too soon to say what the outcome will be of the congressional debate on health reform. But one thing is for sure: unless we find a way of at least slowing the rate of growth of health spending it will not have delivered on our biggest health problem--its cost.

Paul Krugman: That '30s Show

The economy needs more help:

That '30s Show, by Paul Krugman, Commentary, NY Times: O.K., Thursday's jobs report settles it. We're going to need a bigger stimulus. But does the president know that?...

Since the recession began, the U.S. economy has lost 6 ½ million jobs — and as that grim employment report confirmed, it's continuing to lose jobs at a rapid pace. Once you take into account the 100,000-plus new jobs that we need each month just to keep up with a growing population, we're about 8 ½ million jobs in the hole.

And the ... job figures weren't the only bad news in Thursday's report, which also showed wages stalling and possibly on the verge of outright decline. That's a recipe for a descent into Japanese-style deflation, which is very difficult to reverse. Lost decade, anyone?

Wait — there's more bad news: the fiscal crisis of the states. Unlike the federal government, states are required to run balanced budgets. And faced with a sharp drop in revenue, most states are preparing savage budget cuts, many of them at the expense of the most vulnerable. Aside from directly creating a great deal of misery, these cuts will depress the economy even further.

So what do we have to counter this scary prospect? We have the Obama stimulus plan, which aims to create 3 ½ million jobs by late next year. That's ... not remotely enough. And there doesn't seem to be much else going on. Do you remember the administration's plan to sharply reduce the rate of foreclosures, or its plan to get the banks lending again by taking toxic assets off their balance sheets? Neither do I.

All of this is depressingly familiar to anyone who has studied economic policy in the 1930s. ... President Obama and his officials need to ramp up their efforts, starting with a plan to make the stimulus bigger. Just to be clear, I'm well aware of how difficult it will be to get such a plan enacted.

There won't be any cooperation from Republican leaders... Indeed, these leaders responded to the latest job numbers by proclaiming the failure of the Obama economic plan. That's ludicrous, of course. The administration warned from the beginning that it would be several quarters before the plan had any major positive effects. ...

It's also not clear whether the administration will get much help from Senate "centrists," who partially eviscerated the original stimulus plan...

And as an economist, I'd add that many members of my profession are playing a distinctly unhelpful role.

It has been a rude shock to see so many economists with good reputations recycling old fallacies — like the claim that any rise in government spending automatically displaces an equal amount of private spending, even when there is mass unemployment — and ... grossly exaggerated claims about the evils of short-run budget deficits. ...

Also, as in the 1930s, the opponents of action are peddling scare stories about inflation even as deflation looms.

So getting another round of stimulus will be difficult. But it's essential.

Obama administration economists understand the stakes. Indeed, just a few weeks ago, Christina Romer, the chairwoman of the Council of Economic Advisers, published an article on the "lessons of 1937" — the year that F.D.R. gave in to the deficit and inflation hawks, with disastrous consequences...

What I don't know is whether the administration has faced up to the inadequacy of what it has done so far.

So here's my message to the president: You need to get both your economic team and your political people working on additional stimulus, now. Because if you don't, you'll soon be facing your own personal 1937.

links for 2009-07-03

links for 2009-07-03

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